How to Save Money for Kids: Accounts & Plans

Saving money for children offers a path toward securing their future, providing a foundation for significant life milestones like higher education, purchasing a first home, or achieving financial independence. Starting early allows contributions to benefit from compounding, where earnings on investments begin to generate their own earnings over time. This approach cultivates financial discipline and provides children with a valuable head start as they transition into adulthood. The long-term accumulation of funds can reduce future financial burdens and empower children with choices.

Basic Savings Accounts

Basic savings accounts offer a straightforward, low-risk method for children to begin saving. These accounts typically feature low minimum balance requirements and are commonly linked to a parent’s or guardian’s existing account for oversight. Funds held in these accounts benefit from federal insurance, provided by the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA) for credit unions.

To open a basic savings account for a minor, you will need personal identification for the parent or guardian, along with proof of address. The child’s Social Security Number and date of birth are also necessary. Funds can be deposited through various methods, including direct deposit, electronic transfers, or cash deposits at a branch.

Parents maintain control over the account. Many youth-specific accounts offer educational resources and tools to help children understand financial concepts, such as setting savings goals and tracking their balance growth. While designed for safety and accessibility, these accounts offer modest interest rates, making them suitable for short-term savings or as an introductory tool for financial literacy rather than long-term wealth accumulation.

Investment Accounts

Beyond basic savings, investment accounts provide an avenue for long-term growth. These accounts allow for investments in various assets like mutual funds, exchange-traded funds (ETFs), and individual stocks and bonds. Investing for a child’s distant future allows for a longer time horizon, which can help mitigate market fluctuations and maximize the potential for compounding returns.

Brokerage firms offer platforms to purchase and manage investments. Many firms provide custodial brokerage accounts for minors, allowing an adult to manage investments on the child’s behalf. These accounts facilitate buying and selling securities and can be funded with cash or by transferring existing investments. Some platforms offer automated investment options, simplifying regular contributions and portfolio rebalancing.

When selecting investments, consider diversification across different asset classes to manage risk. The benefit of these accounts is the potential for long-term growth, which can outpace returns found in traditional savings accounts.

Education-Focused Savings Plans

For families prioritizing future educational expenses, specialized savings plans such as 529 plans and Coverdell Education Savings Accounts (ESAs) offer distinct advantages, primarily in tax benefits. These plans are designed to help cover qualified educational expenses, from kindergarten through higher education.

529 plans are state-sponsored investment accounts that allow contributions to grow tax-deferred, and withdrawals are tax-free when used for qualified education expenses. Qualified expenses include tuition, fees, books, supplies, and room and board for higher education, and up to $10,000 per year for K-12 tuition, with additional K-12 expenses like curriculum, books, tutoring, and online courses also qualified. Contributions to 529 plans are treated as gifts for tax purposes, with an annual gift tax exclusion of $19,000 per donor per beneficiary in 2025, or $38,000 for married couples filing jointly. Some states offer tax deductions or credits for their contributions. To open a 529 plan, you need the beneficiary’s Social Security Number and the account owner’s information.

Coverdell ESAs also provide tax-free growth and tax-free withdrawals for qualified education expenses, encompassing both K-12 and higher education costs. Unlike 529 plans, Coverdell ESAs have a lower annual contribution limit, set at $2,000 per beneficiary across all accounts. Eligibility to contribute is subject to income limitations, with a modified adjusted gross income (MAGI) phase-out for single filers between $95,000 and $110,000, and for married couples filing jointly between $190,000 and $220,000. Qualified expenses for Coverdell ESAs are broader for K-12, including tuition, books, supplies, equipment, academic tutoring, and special needs services. Account balances must be used or rolled over by the time the beneficiary reaches age 30.

Custodial Accounts

Custodial accounts, established under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), provide a legal framework for adults to hold and manage assets for a minor. The assets legally belong to the child, but an adult, known as the custodian, controls them until the child reaches the age of majority. The age of majority ranges from 18 to 21, depending on state law.

A distinction between the two is the types of assets they can hold. UGMA accounts are limited to financial assets like cash, stocks, bonds, and mutual funds. UTMA accounts offer broader flexibility, allowing for a wider range of assets, including real estate, art, and other tangible property, in addition to financial assets. Once assets are transferred into these accounts, the gift is irrevocable, meaning the custodian cannot reclaim them.

Income generated within UGMA and UTMA accounts is subject to “kiddie tax” rules. For 2025, the first $1,350 of a child’s unearned income is tax-free; the next $1,350 is taxed at the child’s income tax rate, and any unearned income exceeding $2,700 is then taxed at the parent’s marginal tax rate. While there are no federal contribution limits, contributions are subject to annual gift tax exclusion rules, which are $19,000 per donor per beneficiary in 2025. When the child reaches the age of majority, the custodian must transfer control of the account and its assets to the child, who can then use the funds for any purpose they choose.